Dual Status Aliens – Part II: Tax Deductions, Exemptions and Credits

Dual Status Aliens are entitled to certain tax deductions, exemptions, and credits.

As we noted in Part I, if you are a Dual Status Alien, you must pay taxes on your worldwide income for the part of the year that you are a resident alien and on your U.S. income alone for the part of the year that you are a nonresident alien. In this post, we will discuss the limitations placed on some of the tax deductions and exemptions during your transition year.

How do I file my taxes if I am a U.S. resident alien for part of the year and a non-resident for part of the year?

This depends on whether you are a resident or a nonresident on the last day of the tax year.

  • For Dual Status Aliens who start the year as a nonresident and finish the year as a resident, you must file an IRS Form 1040, U.S. Individual Income Tax Return and write “Dual-Status Return” across the top of the Form. A separate statement must be attached to your return that shows your income for the part of the year that you were a nonresident – this statement may be a Form 1040NR, U.S. Nonresident Alien Income Tax Return or a Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents. “Dual-Status Statement” should be written across the top.
  • For Dual Status Aliens who start the year as a resident and finish the year as a nonresident, you must file a Form 1040NR or Form 1040NR-EZ. You may use Form 1040 as your statement. “Dual-Status Return” and “Dual-Status Statement” must be written across the top of these forms.

Dual-status returns and their accompanying statements cannot be e-filed.

What tax deductions are available to me as a Dual Status Alien?

As a Dual Status Alien, you may not use the standard deduction on your 1040 tax form, but are permitted to itemize allowable deductions. For your nonresident portion of the year, you are generally allowed to deduct only amounts related to a U.S. trade or business, including ordinary and necessary business expenses, state and local taxes, casualty and theft losses, miscellaneous itemized deductions, and contributions to qualified U.S. charities. For the time you spend in the U.S. as a resident, you can claim all of the itemized deductions that U.S. citizens do, including medical expenses and mortgage interest.

How about tax exemptions?

During the portion of the year that you are a resident alien, you may claim all of the exemptions that U.S. citizens do. Note that the exemptions may not exceed your taxable income for the part of the year that you are a resident.

For the time that you were a U.S. nonresident alien, the only exemption available to you is a personal exemption, and only if you are not claimed as a dependent on someone else’s tax return. Note that special rules apply to certain dual status taxpayers from Canada, Mexico, India, and the Republic of Korea.

If I am a Dual-Status Alien, can I file a joint return with my spouse?

Unless you choose resident alien status for the entire year, you cannot file a joint return with your spouse. To qualify as a U.S. resident for the entire year, you must:

  • Be a nonresident alien at the beginning of the year,
  • Be a resident alien at the end of the year,
  • Be married to a U.S. citizen or resident alien at the end of the year, and
  • Your spouse must make the election with you.

In this case, you and your spouse will both be taxed on your worldwide income. Although You must file a joint income tax return that year, but you can file separate returns in later years if you choose to do so.

Can I file as Head of Household?

If you are a nonresident alien at any time during the tax year, you cannot file as head of household.

Can I make any adjustments to gross income for the period that I was a nonresident alien?

For the most part, yes. For those who qualify, the following adjustments to gross income may be claimed by nonresident aliens:

  • IRA deductions
  • Self-Employed (SEP), SIMPLE, and Qualified Plan contribution deductions
  • Archer MSA, Health Savings Account (HSA), and Self-Employed Health Insurance deductions
  • Domestic Production Activities Deduction
  • Moving Expenses
  • Penalty for early withdrawal of savings
  • Student Loan Interest Deduction
  • Scholarship and Fellowship Grants (excluded from income)

Are any tax credits available to me?

Most tax credits can only be claimed by married nonresident aliens if you and your spouse file resident alien status for the entire year and file jointly.

Resident aliens may claim tax credits under the same rules that apply to U.S. citizens, including the following:

  • Foreign Tax Credit
  • Retirement Savings Contributions Credit
  • Adoption Credit
  • Child and Dependent Care Credit
  • Credit for the Elderly or Disabled
  • Education Credits
  • Child and Dependent Care Credit
  • Earned Income Credit
  • Child Tax Credit

Note that nonresident aliens may receive tax credits under certain circumstances, but only if they receive effectively connected income. See Publication 519.

Our lawyers are experienced in all facets of tax law

The tax attorneys at Moskowitz, LLP represent both U.S. and foreign taxpayers in all facets of tax controversy. Our primary goal is to resolve the controversy early without legal proceedings, although we do not hesitate to go to court if litigation will best serve the interests of our clients. If you are a Dual Status Alien who requires legal tax counsel, contact our San Francisco office today.